Rolling the Dice on Gaming Stocks

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist

Investing in Gaming Stocks

Last week, I spent a few days at a casino resort in California. While I expected the weekend to be busy, I was surprised at how crowded it was on Thursday night and Friday morning.

Every time I set foot into the casino, the place was humming with activity. On several trips to the poker room, tables were full and I had to wait to be seated.

Even at 4:30 AM, as I passed through on the way to Starbucks before catching my ride to the airport, the electronic sounds of slot machines in use filled the room.

The restaurants were always crowded.

Regardless of what you think of the economy, it’s hard to deny that casinos aren’t only surviving, but thriving.

In Las Vegas, gambling revenue was up 5.1% in 2011. Macau, where a lot of American casinos have investments, is even hotter, with revenue soaring 42% in 2011.

Bet With the House

I used to love to gamble. Blackjack was my game. But then I learned how to play poker and the appeal of trying to beat the house vanished. Now, if I lose my money at the poker tables, I can only blame myself (or the superior play of an opponent). The odds aren’t stacked against me from the moment I sit down.

Imagine if you could bet with the house instead of playing against it. Well, you can by investing in the right gaming stocks.

The best way to bet with the house, in my opinion, is Las Vegas Sands (NYSE: LVS). Las Vegas Sands owns the Venetian and Palazzo in Las Vegas and five properties in Macau, the gambling capital of Asia.

Las Vegas Sands has been coming up in my proprietary S.T.A.R.S. system, - a stock-picking model that utilizes supercomputing power. The technology behind S.T.A.R.S. was designed by the same programmer who created programs for some of the largest and most successful quantitative hedge funds in the world.

S.T.A.R.S. identified Las Vegas Sands in early January due to its 17.6% annual growth rate in book value and quarterly earnings, which have doubled in the past year. I recommended the stock in The Oxford Systems Trader, my research service that uses S.T.A.R.S., at $48.36. The stock is up 17% since then, although the June calls I recommended at the same time are up 80%. That compares with a 5.5% rise in the S&P 500 during the same period.

Even though we’re already up on the stock, Las Vegas Sands remains my favorite casino stock going forward.

Bet Against the House

Usually, you don’t want to bet against the house. But in one case, a company’s director is. Wynn Resorts (Nasdaq: WYNN) is having a dust-up with a member of its board of directors.

Kazuo Okada, the Director and the company’s largest shareholder, is upset that the company made a $135-million donation to the University of Macau and has asked management for access to the books. Management has refused. Okada is suing the company in order to be allowed to examine the company’s books. And now the SEC is involved, launching an “informal inquiry” into the donation.

So you have someone on the board of directors who has to sue the company in order to be to allowed to look at the company’s books, and the SEC gets involved. In the financial community, that’s what’s known as “not good.”

This weekend, Wynn pulled a stunning move, accusing Okada of improper payments to gambling regulators and forcibly buying back his 20% stake in the company at a 30% discount to the market, and asked Mr. Okada to resign.

Okada has vowed to fight the forcible sale of his stock.

It raises a lot of questions. Why would the company not permit one of its own board members to see internal documents? A director is responsible to shareholders. Management has a fiduciary duty to its shareholders. They’re supposed to be on the same team.

Granted, managements and boards don’t always see eye to eye, but the goal should always be enhancing shareholder value.

Something smells rotten here and I think it’s only a matter of time before the whole story gets out. And when it does, I suspect shares of Wynn will be worth a lot less than they are now.

Casino stocks, which have performed nicely since the beginning of the year, should continue to do well as the economy improves. But even with gamblers at the tables, Wynn is likely going to crap out.

Good Investing,

Marc Lichtenfeld

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